A call to rethink cognitive diversity strategies in asset management

A major new study has challenged the commonly held assumption that diversity, particularly cognitive diversity, guarantees stronger team performance and investment decisions.

The research project, which was led by Alex Edmans, professor of finance at the London Business School, and commissioned by the Diversity Project, explores the relationship between cognitive diversity and performance in the asset management sector.

The Diversity Project’s decision to revisit the business case for diversity of thought comes amid the increasing backlash against diversity, equity and inclusion (DEI) policies.

The Cognitive Diversity in Asset Management  paper, which was published this week, argues that while cognitive diversity has significant benefits, it is not a magic bullet and comes with substantial challenges and costs if inauthentically implemented.

“We can’t just add cognitive diversity ‘and stir’, it needs careful leadership and management,” warned Edmans, during a presentation of the study this week. He argued that cognitive diversity alone is insufficient without intentional leadership.

“We need strong and nuanced leadership to actively harness the benefits while mitigating the costs, rather than just assembling diversity and letting it do its magic.”

“The idea [cognitive diversity] is simple, but not easy. It is simple in that we know where to get to, but it’s not easy getting there,” said Edmans.

Edmans has been a longstanding challenger of certain diversity strategies, and in 2023 notably took aim at Nicolai Tangen, chief executive officer of Norges Bank Investment Management (NBIM), for endorsing a BlackRock report about gender diversity.

Edmans runs a website entitled ‘May Contain Lies’ and published a link to his analysis on what he called “serious flaws” in the BlackRock report.

Psychological safety and inclusion

Among Edman’s key findings was that cognitive diversity increases performance only when psychological safety is high – a concept defined as “a shared belief held by members of a team that the team is safe for interpersonal risk taking”.

Crucially, Edmans found that in cases where psychological safety is low, then cognitive diversity might be harmful, such as in cases where people have different opinions and yet must bury them, or where the team suffers lower coordination and affinity without the benefits of higher idea sharing.

“We need strong and nuanced leadership to actively harness the benefits while mitigating the costs”

Alex Edmans, London Business School

“Our interest here is not so much on the benefits of psychological safety per se, which are well established, but on how it increases the benefits of cognitive diversity,” said Edmans.

Mirroring some of Edman’s arguments, a panel of asset management leaders went on to discuss the challenges of creating an environment where people feel comfortable in challenging consensus.

“The most important vulnerability that you want to see expressed in your investment teams is the vulnerability amongst peers,” said Paras Anand, chief investment officer at Artemis Investment Managers.

“Sometimes you feel the judgment most acutely when challenging your peers’ perspectives,” he added.

Speaking on the challenge of creating an environment where different perspectives can be effectively communicated, Tord Stallvik, chief executive officer of Redwheel, added: “Sometimes you’re in meetings where somebody says something and you think, ‘Oh my God, you’re not hearing what I’m saying.’ But then you realise afterwards, it is just because they see things differently.”

Recommendations

Edmans’ key recommendations from the report emphasise that cognitive diversity requires leaders to explicitly value and encourage diverse viewpoints, including dissent and constructive challenge, in order to harness cognitive diversity effectively.

Additionally, Edmans stressed the need for tailoring cognitive diversity to the task and setting, stressing that innovation tasks benefit more from diversity, whereas execution tasks may require less diversity.

Practices to avoid, according to Edmans, include “forced” diversity targets that can create division or undermine inclusion. Furthermore, he urged firms to rethink their diversity strategies beyond recruitment and consider culture and processes.

“Rather than saying, ‘Oh, it’s difficult, let’s just not bother,’ this difficulty should make this [cognitive diversity] even more attractive for any company, because if it’s something which your competitors are not able to manage effectively, then any firm that is able to do it well will have sustainable competitive technology,” Edmans concluded.

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